UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to __________________ Commission file number: 1-6494 INDIANA GAS COMPANY, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) INDIANA 35-0793669 ------------------------------- ------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 20 N.W. 4th Street, Evansville, Indiana, 47708 ------------------------------------------------------- (Address of principal executive offices) (Zip Code) 812-491-4000 ------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No __ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes __ No |X| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock- Without Par Value 805.001 October 31, 2003 ------------------------------- ---------------- ---------------- Class Number of Shares Date Omission of Information by Certain Wholly Owned Subsidiaries The Registrant is a wholly owned subsidiary of Vectren Utility Holdings, Inc. and meets the conditions set forth in General Instructions (H)(1)(a) and (b) of Form 10-Q and is therefore filing with the reduced disclosure format contemplated thereby. Table of Contents Item Page Number Number PART I. FINANCIAL INFORMATION 1 Financial Statements (Unaudited) Indiana Gas Company, Inc. Condensed Balance Sheets 1-2 Condensed Statements of Income 3 Condensed Statements of Cash Flows 4 Notes to Unaudited Condensed Financial Statements 5-10 2 Management's Discussion and Analysis of Results of 11-15 Operations and Financial Condition (A) 3 Quantitative and Qualitative Disclosures About Market Risk (A) 15 4 Controls and Procedures 15 PART II. OTHER INFORMATION 1 Legal Proceedings 16 6 Exhibits and Reports on Form 8-K 16 Signatures 17 (A) Omitted or amended as the Registrant is a wholly-owned subsidiary of Vectren Utility Holdings, Inc. and meets the conditions set forth in General Instructions (H)(1)(a) and (b) of Form 10-Q and is therefore filing with the reduced disclosure format contemplated thereby. Access to Information Vectren Corporation makes available all SEC filings and recent annual reports free of charge, including those of its wholly owned subsidiaries, through its website at www.vectren.com, or by request, directed to Investor Relations at the mailing address, phone number, or email address that follows: Mailing Address: Phone Number: Investor Relations Contact: P.O. Box 209 (812) 491-4000 Steven M. Schein Evansville, Indiana Vice President, Investor Relations 47702-0209 sschein@vectren.com Definitions AFUDC: allowance for funds used during MCF / BCF: millions / billions of construction cubic feet APB: Accounting Principles Board MDth / MMDth: thousands / millions of dekatherms EITF: Emerging Issues Task Force OUCC: Indiana Office of the Utility Consumer Counselor FASB: Financial Accounting Standards Board SFAS: Statement of Financial Accounting Standards IDEM: Indiana Department of Environmental Throughput: combined gas sales Management and gas transportation volumes IURC: Indiana Utility Regulatory Commission PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INDIANA GAS COMPANY, INC. CONDENSED BALANCE SHEETS (Unaudited - In thousands) - -------------------------------------------------------------------------------- September 30, December 31, 2003 2002 - ------------------------------------------------ ------------- ------------ ASSETS Utility Plant Original cost $ 1,184,821 $ 1,148,614 Less: accumulated depreciation & amortization 519,736 492,673 - -------------------------------------------------------------------------------- Net utility plant 665,085 655,941 - -------------------------------------------------------------------------------- Current Assets Cash & cash equivalents 2,978 3,729 Accounts receivable-less reserves of $1,960 & $1,399, respectively 16,814 48,446 Receivables due from other Vectren companies 38 10,754 Accrued unbilled revenues 13,080 53,192 Inventories 10,941 13,286 Recoverable gas costs 13,604 10,241 Prepayments & other current assets 76,479 37,090 - -------------------------------------------------------------------------------- Total current assets 133,934 176,738 - -------------------------------------------------------------------------------- Investment in the Ohio operations 222,294 220,417 Other Investments 2,773 2,459 Non-Utility Property - Net 215 253 Regulatory Assets 19,306 18,132 Other Assets 3,232 4,207 - -------------------------------------------------------------------------------- TOTAL ASSETS $ 1,046,839 $ 1,078,147 ================================================================================ The accompanying notes are an integral part of these condensed financial statements. INDIANA GAS COMPANY, INC. CONDENSED BALANCE SHEETS (Unaudited - In thousands) - -------------------------------------------------------------------------------- September 30, December 31, 2003 2002 - -------------------------------------------------- ------------- ------------ LIABILITIES & SHAREHOLDER'S EQUITY Capitalization Common shareholder's equity Common stock (no par value) $ 357,995 $ 242,995 Retained earnings 73,023 79,061 - -------------------------------------------------------------------------------- Total common shareholder's equity 431,018 322,056 - -------------------------------------------------------------------------------- Long-term debt-net of current maturities 214,917 228,480 Long-term debt due to VUHI 184,448 147,275 - -------------------------------------------------------------------------------- Total capitalization 830,383 697,811 - -------------------------------------------------------------------------------- Commitments & Contingencies (Notes 4, 8, & 9) Current Liabilities Accounts payable 13,494 33,728 Accounts payable to affiliated companies 27,695 47,255 Accounts payable due to other Vectren companies 7,953 38,818 Accrued liabilities 33,822 30,052 Short-term borrowings due to VUHI 52,265 108,182 Current maturities of long-term debt - 38,750 - -------------------------------------------------------------------------------- Total current liabilities 135,229 296,785 - -------------------------------------------------------------------------------- Deferred Income Taxes & Other Liabilities Deferred income taxes 45,509 45,601 Deferred credits & other liabilities 35,718 37,950 - -------------------------------------------------------------------------------- Total deferred credits & other liabilities 81,227 83,551 - -------------------------------------------------------------------------------- TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $ 1,046,839 $ 1,078,147 ================================================================================ The accompanying notes are an integral part of these condensed financial statements. INDIANA GAS COMPANY, INC. CONDENSED STATEMENTS OF INCOME (Unaudited - In thousands) - ------------------------------------------------------------------------------------- Three Months Nine Months Ended September 30, Ended September 30, ----------------------- --------------------- 2003 2002 2003 2002 - ------------------------------------------------------------------------------------- As Restated, As Restated, See Note 3 See Note 3 ----------- ----------- OPERATING REVENUES $ 73,606 $ 57,900 $ 473,832 $ 342,054 COST OF GAS 45,908 29,648 319,426 201,877 - ------------------------------------------------------------------------------------- GAS OPERATING MARGIN 27,698 28,252 154,406 140,177 - ------------------------------------------------------------------------------------- OPERATING EXPENSES Other operating 20,914 18,053 63,540 58,124 Depreciation & amortization 10,912 10,124 32,236 30,281 Income taxes (5,078) (4,077) 9,052 5,060 Taxes other than income taxes 3,075 3,470 12,897 11,781 - ------------------------------------------------------------------------------------- Total operating expenses 29,823 27,570 117,725 105,246 - ------------------------------------------------------------------------------------- OPERATING INCOME (LOSS) (2,125) 682 36,681 34,931 OTHER INCOME (EXPENSE)-NET Equity in earnings (losses) of the Ohio operations-net of tax (2,100) (2,229) 1,877 3,216 Other - net 306 36 (914) 657 - ------------------------------------------------------------------------------------- Total other income (expense)-net (1,794) (2,193) 963 3,873 - ------------------------------------------------------------------------------------- Interest expense 7,217 7,827 21,742 24,053 - ------------------------------------------------------------------------------------- NET INCOME (LOSS) $ (11,136) $ (9,338) $ 15,902 $ 14,751 ===================================================================================== The accompanying notes are an integral part of these condensed financial statements. INDIANA GAS COMPANY, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited - In thousands) - ------------------------------------------------------------------------------- Nine Months Ended September 30, ------------------------- 2003 2002 - ------------------------------------------------------------------------------- As Restated, See Note 3 ----------- NET CASH FLOWS FROM OPERATING ACTIVITIES $ 18,333 $ 100,062 - ------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from: Common stock issuance to VUHI 115,000 - Long-term debt issuance to VUHI 37,137 - Requirements for: Retirement of long-term debt, including premiums paid (53,429) (6,470) Dividends to VUHI (21,940) (22,340) Net change in short-term borrowings due to VUHI (55,917) (36,386) - ------------------------------------------------------------------------------- Net cash flows from financing activities 20,851 (65,196) - ------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures, excluding AFUDC-equity (39,935) (30,184) Other investments - (1,494) - ------------------------------------------------------------------------------- Net cash flows from investing activities (39,935) (31,678) - ------------------------------------------------------------------------------- Net (decrease) increase in cash & cash equivalents (751) 3,188 Cash & cash equivalents at beginning of period 3,729 268 - ------------------------------------------------------------------------------- Cash & cash equivalents at end of period $ 2,978 $ 3,456 =============================================================================== The accompanying notes are an integral part of these condensed financial statements. INDIANA GAS COMPANY, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. Organization and Nature of Operations Overview Indiana Gas Company, Inc. (the Company or Indiana Gas), an Indiana corporation, provides natural gas distribution and transportation services to a diversified customer base in 49 of Indiana's 92 counties. Indiana Gas is a direct wholly owned subsidiary of Vectren Utility Holdings, Inc. (VUHI). VUHI is a direct, wholly owned subsidiary of Vectren Corporation (Vectren). Vectren, an Indiana corporation, is an energy and applied technology holding company headquartered in Evansville, Indiana. Vectren was organized on June 10, 1999, solely for the purpose of effecting the merger of Indiana Energy, Inc. (Indiana Energy) and SIGCORP, Inc. (SIGCORP). On March 31, 2000, the merger of Indiana Energy with SIGCORP and into Vectren was consummated with a tax-free exchange of shares and has been accounted for as a pooling-of-interests in accordance with Accounting Principles Board (APB) Opinion No. 16 "Business Combinations." Vectren's wholly owned subsidiary, VUHI, serves as the intermediate holding company for its three operating public utilities: Indiana Gas, formerly a wholly owned subsidiary of Indiana Energy, Southern Indiana Gas and Electric Company (SIGECO), formerly a wholly owned subsidiary of SIGCORP, and the Ohio operations. Both Vectren and VUHI are exempt from registration pursuant to Section 3(a)(1) and 3(c) of the Public Utility Holding Company Act of 1935. Investment in the Gas Distribution Assets of The Dayton Power and Light Company - ------------------------------------------------------------------------------- On October 31, 2000, Vectren acquired the natural gas distribution assets of The Dayton Power and Light Company for approximately $471 million, including transaction costs, as a tenancy in common through two separate wholly owned subsidiaries. Vectren Energy Delivery of Ohio, Inc. (VEDO) holds a 53% undivided ownership interest in the assets, and Indiana Gas holds a 47% undivided ownership interest. VEDO is the operator of the assets, and these assets are referred to as "the Ohio operations." Indiana Gas' ownership is accounted for using the equity method in accordance with APB Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock" and is included in investment in the Ohio operations, and its interest in the results of operations is included in equity in earnings of the Ohio operations. The Ohio operations provide natural gas distribution and transportation services to 17 counties in west central Ohio, including counties surrounding Dayton. 2. Basis of Presentation The interim condensed financial statements included in this report have been prepared by the Company, without audit, as provided in the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted as provided in such rules and regulations. The Company believes that the information in this report reflects all adjustments necessary to fairly state the results of the interim periods reported. These condensed financial statements and related notes should be read in conjunction with the Company's audited annual financial statements for the year ended December 31, 2002, filed on Form 10-K/A. Because of the seasonal nature of the Company's utility operations, the results shown on a quarterly basis are not necessarily indicative of annual results. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. 3. Restatement of Previously Reported Information Subsequent to the issuance of the Company's 2002 quarterly financial statements, the Company's management determined that previously issued financial statements should be restated. The restatement had the effect of increasing net income for the three and nine months ended September 30, 2002, by $0.2 million after tax and $1.3 million after tax, respectively. During the nine months ended September 30, 2002, the Company identified errors related to the recording of estimates used in the calculation of unbilled revenue. As a result, earnings for the nine months ended September 30, 2002, increased by $2.1 million ($1.3 million after tax). Additionally, the Company identified reconciliation errors and errors related to the recording of other estimates that were not significant, either individually or in the aggregate, that had an impact of less than $0.1 million after tax on previously reported earnings for the nine months ended September 30, 2002, and increased previously reported earnings for the three months ended September 30, 2002, by approximately $0.2 million after tax. Following is a summary of the effects of the restatement on previously reported results of operations for the three months ended September 30, 2002. In Thousands - -------------------------------------------------------------------------------- As reported Restatement As Restated ----------- ----------- ----------- OPERATING REVENUES $ 57,544 $ 356 $ 57,900 COST OF GAS 29,648 - 29,648 - -------------------------------------------------------------------------------- GAS OPERATING MARGIN 27,896 356 28,252 - -------------------------------------------------------------------------------- OPERATING EXPENSES Other operating 17,756 297 18,053 Depreciation & amortization 10,124 - 10,124 Income taxes (4,212) 135 (4,077) Taxes other than income taxes 3,470 - 3,470 - -------------------------------------------------------------------------------- Total operating expenses 27,138 432 27,570 - -------------------------------------------------------------------------------- OPERATING INCOME 758 (76) 682 OTHER INCOME (EXPENSE) - NET Equity in earnings (losses) of the Ohio operations - net of tax (2,249) 20 (2,229) Other - net 26 10 36 - -------------------------------------------------------------------------------- Total other income (expense) - net (2,223) 30 (2,193) - -------------------------------------------------------------------------------- Interest expense 8,115 (288) 7,827 - -------------------------------------------------------------------------------- NET INCOME (LOSS) $ (9,580) $ 242 $ (9,338) ================================================================================ Following is a summary of the effects of the restatement on previously reported results of operations for the nine months ended September 30, 2002. In thousands - ---------------------------------------------------------------------------------- As reported Restatement As Restated ------------ ----------- ----------- OPERATING REVENUES $ 339,052 $ 3,002 $ 342,054 COST OF GAS 201,877 - 201,877 - ---------------------------------------------------------------------------------- GAS OPERATING MARGIN 137,175 3,002 140,177 - ---------------------------------------------------------------------------------- OPERATING EXPENSES Other operating 57,454 670 58,124 Depreciation & amortization 30,281 - 30,281 Income taxes 4,128 932 5,060 Taxes other than income taxes 11,781 - 11,781 - ---------------------------------------------------------------------------------- Total operating expenses 103,644 1,602 105,246 - ---------------------------------------------------------------------------------- OPERATING INCOME 33,531 1,400 34,931 OTHER INCOME (EXPENSE) - NET Equity in earnings of the Ohio operations - net of tax 3,458 (242) 3,216 Other - net 628 29 657 - ---------------------------------------------------------------------------------- Total other income (expense) - net 4,086 (213) 3,873 - ---------------------------------------------------------------------------------- Interest expense 24,147 (94) 24,053 - ---------------------------------------------------------------------------------- NET INCOME $ 13,470 $ 1,281 $ 14,751 ================================================================================== 4. Transactions with Other Vectren Companies Support Services and Purchases Vectren and certain subsidiaries of Vectren provided corporate and general and administrative services to the Company including legal, finance, tax, risk management, human resources, which includes charges for restricted stock compensation and for pension and other postretirement benefits not directly charged to subsidiaries. These costs have been allocated using various allocators, primarily number of employees, number of customers and/or revenues. Allocations are based on cost. Indiana Gas received corporate allocations totaling $15.2 million and $12.1 million, respectively, for the three months ended September 30, 2003 and 2002, and $44.0 million and $38.1 million, respectively, for the nine months ended September 30, 2003 and 2002. Guarantees of Parent Company Debt Vectren's three operating utility companies, VEDO, Indiana Gas, and SIGECO are guarantors of VUHI's $346 million in short-term credit facilities, of which $142.5 million is outstanding as of September 30, 2003, and VUHI's $550.0 million unsecured senior notes outstanding at September 30, 2003. The guarantees are full and unconditional and joint and several, and VUHI has no subsidiaries other than the subsidiary guarantors. Stock-Based Incentive Plans Indiana Gas does not have stock-based compensation plans separate from Vectren. An insignificant number of Indiana Gas' employees participate in Vectren's stock-based compensation plans. 5. Transactions with ProLiance Energy, LLC ProLiance Energy, LLC (ProLiance), a nonregulated energy marketing affiliate of Vectren and Citizens Gas and Coke Utility (Citizens Gas), provides natural gas and related services to Indiana Gas, the Ohio operations, Citizens Gas and others. ProLiance also began providing service to SIGECO and Vectren Retail, LLC (Vectren's retail gas marketer) in 2002. ProLiance's primary businesses include gas marketing, gas portfolio optimization, and other portfolio and energy management services. Purchases from ProLiance for resale and for injections into storage for the three months ended September 30, 2003 and 2002 totaled $88.9 million and $58.9 million, respectively, and for the nine months ended September 30, 2003 and 2002, totaled $334.2 million and $202.5 million, respectively. Amounts owed to ProLiance at September 30, 2003, and December 31, 2002, for those purchases were $27.3 million and $46.1 million, respectively, and are included in accounts payable to affiliated companies. Amounts charged by ProLiance for gas supply services are established by supply agreements with each utility. 6. Investment in the Ohio Operations Unaudited summarized financial information of the Ohio operations for the three and nine months ended September 30, 2003 and 2002 is presented below. - ------------------------------------------------------------------------------- Three Months Nine Months Ended September 30, Ended September 30, In thousands 2003 2002 2003 2002 - ------------------------------------------------------------------------------- Operating revenues $ 30,670 $ 23,128 $ 238,232 $ 189,935 Gas operating margin 11,053 9,529 73,572 65,026 Operating income (loss) (4,676) (4,740) 3,478 6,588 Net income (loss) (4,468) (4,743) 3,994 6,840 Interest costs arising from financing arrangements utilized to purchase the Ohio operations are not reflected in the above-summarized financial information. Had the financing arrangements of Indiana Gas and VEDO used to facilitate the acquisition been pushed down to the Ohio operations, the net loss would have been $6.9 million and $7.0 million for the three months ended September 30, 2003 and 2002, respectively. For the nine months ended September 30, 2003, the net loss would have been $3.1 million and net income of $0.1 million for the nine months ended September 30, 2002. 7. Financing Transactions During 2003, the Company called two senior unsecured notes. The first note had a remaining principal amount of $21.3 million, an interest rate of 9.375%, was originally due in 2021, and was redeemed at 105.525% of the stated principal amount. The second note had a principal amount of $13.5 million, an interest rate of 6.75%, was originally due in 2028, and was redeemed at the principal amount. Pursuant to regulatory authority, the premiums paid to retire the net carrying value of these notes totaling $1.1 million were deferred as a regulatory asset. The proceeds to fund the early redemption were received from VUHI in the form of new long-term debt totaling $37.1 million and $115 million in additional equity. To generate the initial proceeds to fund these transactions, in August 2003, VUHI completed a public offering of long-term debt netting proceeds of approximately $203 million, and Vectren completed a public offering of common stock netting proceeds of approximately $163 million. Additionally, in January 2003, Indiana Gas retired other debt totaling $17.5 million. The $37.1 million of new long-term debt due to VUHI has terms identical to the terms of notes issued by VUHI in August 2003 through the public offering. Those notes have an interest rate of 5.75% priced at 99.177% to yield 5.80% to maturity and are due August 2018. They have no sinking fund requirements, and interest payments are due semi-annually. The notes may be called by VUHI, in whole or in part, at any time for an amount equal to accrued and unpaid interest, plus the greater of 100% of the principal amount or the sum of the present values of the remaining scheduled payments of principal and interest, discounted to the redemption date on a semi-annual basis at the Treasury Rate, as defined in VUHI's indenture, plus 25 basis points. 8. Commitments & Contingencies Legal Proceedings The Company is party to various legal proceedings arising in the normal course of business. In the opinion of management, there are no legal proceedings pending against the Company that are likely to have a material adverse effect on its financial position or results of operations. United States Securities and Exchange Commission (SEC) Informal Inquiry As more fully described in Note 3 to these consolidated condensed financial statements and in Note 3 to the 2002 consolidated financial statements filed on Form 10-K/A, the Company restated its consolidated financial statements for 2000, 2001, and 2002 quarterly results. The Company is cooperating with the SEC in an informal inquiry with respect to this previously announced restatement, has met with the staff of the SEC, and has provided information in response to their requests. 9. Environmental Matters In the past, Indiana Gas and others operated facilities for the manufacture of gas. Given the availability of natural gas transported by pipelines, these facilities have not been operated for many years. Under currently applicable environmental laws and regulations, Indiana Gas and others may now be required to take remedial action if certain byproducts are found above the regulatory thresholds at these sites. Indiana Gas has identified the existence, location, and certain general characteristics of 26 gas manufacturing and storage sites for which it may have some remedial responsibility. Indiana Gas has completed a remedial investigation/feasibility study (RI/FS) at one of the sites under an agreed order between Indiana Gas and the IDEM, and a Record of Decision was issued by the IDEM in January 2000. Although Indiana Gas has not begun an RI/FS at additional sites, Indiana Gas has submitted several of the sites to the IDEM's Voluntary Remediation Program and is currently conducting some level of remedial activities including groundwater monitoring at certain sites where deemed appropriate and will continue remedial activities at the sites as appropriate and necessary. In conjunction with data compiled by environmental consultants, Indiana Gas has accrued the estimated costs for further investigation, remediation, groundwater monitoring, and related costs for the sites. While the total costs that may be incurred in connection with addressing these sites cannot be determined at this time, Indiana Gas has recorded costs that it reasonably expects to incur totaling approximately $20.4 million. The estimated accrued costs are limited to Indiana Gas' proportionate share of the remediation efforts. Indiana Gas has arrangements in place for 19 of the 26 sites with other potentially responsible parties (PRP), which serve to limit Indiana Gas' share of response costs at these 19 sites to between 20% and 50%. With respect to insurance coverage, Indiana Gas has received and recorded settlements from all known insurance carriers in an aggregate amount approximating $20.4 million. Environmental matters related to manufactured gas plants have had no material impact on earnings since costs recorded to date approximate PRP and insurance settlement recoveries. While Indiana Gas has recorded all costs which it presently expects to incur in connection with activities at these sites, it is possible that future events may require some level of additional remedial activities which are not presently foreseen. 10. Impact of Recently Issued Accounting Guidance SFAS 143 In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143). SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The Company adopted this statement on January 1, 2003. The adoption was not material to the Company's results of operations or financial condition. In accordance with regulatory treatment, the Company collects an estimated net cost of removal of its utility plant in rates through normal depreciation. As of September 30, 2003 and December 31, 2002, such removal costs approximated $175 million of accumulated depreciation as presented in the condensed consolidated balance sheets based upon the Company's latest depreciation studies. SFAS 150 In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" (SFAS 150). SFAS 150 requires issuers to classify as liabilities the following three types of freestanding financial instruments: mandatorily redeemable financial instruments; obligations to repurchase the issuer's equity shares by transferring assets; and certain obligations to issue a variable number of shares. SFAS 150 is effective immediately for all financial instruments entered into or modified after May 31, 2003. For all other instruments, SFAS 150 applies to the Company's third quarter of 2003. SFAS 150's adoption did not affect the Company's results of operations or financial condition. FASB Interpretation (FIN) 45 In November 2002, the FASB issued Interpretation 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 clarifies the requirements for a guarantor's accounting for and disclosure of certain guarantees issued and outstanding and that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligations it has undertaken. The initial recognition and measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Since that date, the adoption has not had a material effect on the Company's results of operations or financial condition. FIN 46 In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable Interest Entities" (FIN 46). FIN 46 addresses consolidation by business enterprises of variable interest entities (VIE) and significantly changes the consolidation requirements for those entities. FIN 46 is intended to achieve more consistent application of consolidation policies related to VIE's and, thus improves comparability between enterprises engaged in similar activities when those activities are conducted through VIE's. FIN 46 currently applies to VIE's created after January 31, 2003, and to VIE's in which an enterprise obtains an interest after that date. For entities created prior to January 31, 2003, FIN 46 is to be adopted on December 31, 2003. Although management is still evaluating the impact of FIN 46 on its financial position and results of operations, the adoption is not expected to have a material effect. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Pursuant to General Instructions H(2)(a) of Form 10-Q, the following analysis of the results of operations is presented in lieu of Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations The following discussion and analysis should be read in conjunction with the unaudited condensed financial statements and notes thereto. Subsequent to the issuance of the Company's 2002 quarterly financial statements, the Company's management determined that previously issued financial statements should be restated. The restatement had the effect of increasing net income for the three and nine months ended September 30, 2002, by $0.2 million after tax and $1.3 million after tax, respectively. Note 3 to the condensed financial statements includes a summary of the effects of the restatement. The Company's results of operations give effect to the restatement. Net Income (Loss) The net loss for the third quarter 2003 was $11.1 million as compared to $9.3 million for the same quarter last year, an additional loss of $1.8 million. The primary contributors to the decline were a slowly recovering economy, higher gas costs and the timing of operating expenses. The earnings for the nine months ended September 30, 2003, were $15.9 million as compared to $14.8 million for the same period in 2002, a increase of $1.1 million. Earnings in 2003 were primarily driven by weather that on the year was favorably impacted by an estimated $5.1 million after tax compared to last year partially offset by a slowly recovering economy and increased operating expenses caused by higher gas costs and the timing of routine expenditures. Gas Utility Margin Gas utility margin by customer type and separated between volumes sold and transported follows: - --------------------------------------------------------------------------- Three Months Nine Months Ended September 30, Ended September 30, ------------------- ------------------- (In millions) 2003 2002 2003 2002 - ------------------------- ------------------ ------------------- Residential $ 18.6 $ 17.4 $ 102.4 $ 90.8 Commercial 4.1 4.7 30.1 28.6 Contract 5.6 5.8 19.2 20.1 Other (0.6) 0.3 2.7 0.6 - --------------------------------------------------------------------------- Total gas margin $ 27.7 $ 28.2 $ 154.4 $ 140.1 =========================================================================== Volumes in MMDth Sold 3.8 3.4 48.1 41.0 Transported 10.5 12.1 37.0 39.1 - --------------------------------------------------------------------------- Total throughput 14.3 15.5 85.1 80.1 =========================================================================== Gas margins for the third quarter, a non-heating, base load usage quarter, were $27.7 million, a decrease of 2% compared to the prior year period. While margin was generally flat, residential and commercial usage increased slightly, offset by declining industrial usage due to the slow economic conditions. Gas margins year-to-date were $154.4 million, an increase of $14.3 million over the nine months ended September 30, 2002. It is estimated that weather, 20% colder than the prior year and 6% colder than normal, contributed $8.5 million to the increased margin. The remaining $5.8 million increase is primarily attributable to higher utility receipts taxes on higher gas costs and volumes sold, partially offset by the negative effect of high gas prices on customer usage. The colder weather is the primary reason for the 6% increase in throughput. Higher gas costs and a slowly recovering economy have impacted customer usage. The total average cost per dekatherm of gas purchased for the three and nine months ended September 30, 2003, was $6.49 and $6.63, respectively, compared to $4.43 and $4.49, respectively, for the same periods in 2002. Operating Expenses Other Operating For the three and nine months ended September 30, 2003, other operating expenses increased $2.9 million and $5.4 million, respectively, compared to the same periods in the prior year. The increased expenses were principally due to the timing of routine expenditures between the periods, increased uncollectible accounts expense and increased employee benefit costs. Year-to-date, uncollectible accounts expense has increased $1.4 million compared to the prior year due principally to higher gas costs. Depreciation & Amortization For the three and nine months ended September 30, 2003, depreciation and amortization increased $0.8 million and $2.0 million, respectively, due to a full nine months depreciation on utility plant. Income Tax For the nine months ended September 30, 2003, income taxes increased $4.0 million when compared to 2002. The year-to-date change is primarily due to an increased effective tax rate and increased pre-tax income. Year to date, the effective tax rate increased from 30.5% in 2002 to 39.2% in 2003 principally due to an increase in the Indiana state income tax rate from 4.5% to 8.5% that was effective January 1, 2003, and a non-recurring tax reserve reduction in 2002 of $0.8 million. Taxes Other Than Income Taxes For the three and nine months ended September 30, 2003, taxes other than income taxes decreased $0.4 million and increased $1.1 million, respectively, compared to the prior year. For the quarter, the decrease is attributable to lower property taxes. Year-to-date, the increase results from higher utility receipts taxes as a result of higher gas prices and more volumes sold, partially offset by decreases in property taxes. The higher utility receipts taxes on gas volumes sold are recovered dollar-for-dollar through customer billings. Other Income - Net Equity in Earnings (Losses) of the Ohio operations As described in Note 1 to the financial statements, Indiana Gas has a 47% undivided interest in the Ohio operations acquired by Vectren on October 31, 2000. Equity in earnings (losses) of the Ohio operations represents Indiana Gas' portion of the Ohio operations' net income (loss). The financing costs associated with VEDO's 53% ownership interest are not included in the Ohio operations' equity in earnings (losses). For the three and nine months ended September 30, 2003, equity method losses decreased $0.1 million and earnings declined $1.3 million, respectively, primarily due to higher operating expenses caused partly by higher gas costs. Other- net For the three and nine months ended September 30, 2003, other, net increased $0.3 million and decreased $1.6 million, respectively, compared to the prior year. The year-to-date decrease results principally from increased contributions to low-income heating assistance programs resulting from the ProLiance settlement previously approved by the IURC. Interest Expense For the three and nine months ended September 30, 2003, interest expense decreased $0.6 million and $2.3 million, respectively, when compared to the prior year. The decrease results from lower interest rates on variable rate debt. Results also include permanent financing transactions executed during the year whereby short term borrowings due to VUHI and $34.8 million of higher coupon third party debt were replaced with $115 million in equity and $37.1 million in long term debt payable to VUHI. Impact of Recently Issued Accounting Guidance SFAS 143 In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143). SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The Company adopted this statement on January 1, 2003. The adoption was not material to the Company's results of operations or financial condition. SFAS 150 In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" (SFAS 150). SFAS 150 requires issuers to classify as liabilities the following three types of freestanding financial instruments: mandatorily redeemable financial instruments; obligations to repurchase the issuer's equity shares by transferring assets; and certain obligations to issue a variable number of shares. SFAS 150 is effective immediately for all financial instruments entered into or modified after May 31, 2003. For all other instruments, SFAS 150 applies to the Company's third quarter of 2003. SFAS 150's adoption did not affect the Company's results of operations or financial condition. FASB Interpretation (FIN) 45 In November 2002, the FASB issued Interpretation 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 clarifies the requirements for a guarantor's accounting for and disclosure of certain guarantees issued and outstanding and that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligations it has undertaken. The initial recognition and measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Since that date, the adoption has not had a material effect on the Company's results of operations or financial condition. FIN 46 In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable Interest Entities" (FIN 46). FIN 46 addresses consolidation by business enterprises of variable interest entities (VIE) and significantly changes the consolidation requirements for those entities. FIN 46 is intended to achieve more consistent application of consolidation policies related to VIE's and, thus improves comparability between enterprises engaged in similar activities when those activities are conducted through VIE's. FIN 46 currently applies to VIE's created after January 31, 2003, and to VIE's in which an enterprise obtains an interest after that date. For entities created prior to January 31, 2003, FIN 46 is to be adopted on December 31, 2003. Although management is still evaluating the impact of FIN 46 on its financial position and results of operations, the adoption is not expected to have a material effect. Forward-Looking Information A "safe harbor" for forward-looking statements is provided by the Private Securities Litigation Reform Act of 1995 (Reform Act of 1995). The Reform Act of 1995 was adopted to encourage such forward-looking statements without the threat of litigation, provided those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause the actual results to differ materially from those projected in the statement. Certain matters described in Management's Discussion and Analysis of Results of Operations and Financial Condition are forward-looking statements. Such statements are based on management's beliefs, as well as assumptions made by and information currently available to management. When used in this filing, the words "believe," "anticipate," "endeavor," "estimate," "expect," "objective," "projection," "forecast," "goal," and similar expressions are intended to identify forward-looking statements. In addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements, factors that could cause the Company's actual results to differ materially from those contemplated in any forward-looking statements include, among others, the following: o Factors affecting utility operations such as unusual weather conditions; unusual maintenance or repairs; unanticipated changes to gas supply costs, or availability due to higher demand, shortages, transportation problems or other developments; environmental or pipeline incidents; transmission or distribution incidents; availability due to demand, shortages, transmission problems or other developments; or gas pipeline system constraints. o Increased competition in the energy environment including effects of industry restructuring and unbundling. o Regulatory factors such as unanticipated changes in rate-setting policies or procedures, recovery of investments and costs made under traditional regulation, and the frequency and timing of rate increases. o Financial or regulatory accounting principles or policies imposed by the Financial Accounting Standards Board; the Securities and Exchange Commission; state public utility commissions; state entities which regulate natural gas transmission and distribution, natural gas gathering and processing; and similar entities with regulatory oversight. o Economic conditions including the effects of an economic downturn, inflation rates, and monetary fluctuations. o Changing market conditions and a variety of other factors associated with physical energy and financial trading activities including, but not limited to, price, basis, credit, liquidity, volatility, capacity, interest rate, and warranty risks. o Direct or indirect effects on our business, financial condition or liquidity resulting from a change in credit ratings, changes in interest rates, and/or changes in market perceptions of the utility industry and other energy-related industries. o Employee workforce factors including changes in key executives, collective bargaining agreements with union employees, or work stoppages. o Legal and regulatory delays and other obstacles associated with mergers, acquisitions, and investments in joint ventures. o Costs and other effects of legal and administrative proceedings, settlements, investigations, claims, and other matters, including, but not limited to, those described in Management's Discussion and Analysis of Results of Operations and Financial Condition. o Changes in federal, state or local legislature requirements, such as changes in tax laws or rates, environmental laws and regulations. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of changes in actual results, changes in assumptions, or other factors affecting such statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Pursuant to General Instructions H(2)(c) of Form 10-Q, the following is intentionally omitted. ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures As of September 30, 2003, the Company carried out an evaluation under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of the effectiveness and the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective at providing reasonable assurance that material information relating to the Company required to be disclosed by the Company in its filings under the Securities Exchange Act of 1934 (Exchange Act) is brought to their attention on a timely basis. Disclosure controls and procedures, as defined by the Exchange Act in Rules 13a-15(e) and 15d-15(e), are controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms. "Disclosure controls and procedures" include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in its Exchange Act reports is accumulated and communicated to the Company's management, including its principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Control Over Financial Reporting During the quarter ended September 30, 2003, there have been no significant changes to the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Internal control over financial reporting is defined by the SEC in Final Rule: Management's Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports. The final rule defines internal control over financial reporting as a process designed by, or under the supervision of, the registrant's principal executive and principal financial officers, or persons performing similar functions, and effected by the registrant's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: (1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the registrant; (2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the registrant are being made only in accordance with authorizations of management and directors of the registrant; and (3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the registrant's assets that could have a material effect on the financial statements. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is party to various legal proceedings arising in the normal course of business. In the opinion of management, there are no legal proceedings pending against the Company that are likely to have a material adverse effect on its financial position or results of operations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Certifications 31.1 Certification Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002- Chief Executive Officer 31.2 Certification Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002- Chief Financial Officer 32 Certification Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 Other Exhibits None (b) Reports On Form 8-K During The Last Calendar Quarter On July 11, 2003, Vectren Corporation filed a Current Report on Form 8-K with respect to adjust 2003 earnings guidance and to address recent announcements related to the production of synthetic fuel. Portions of this information were furnished to the SEC Item 5. Other Events and Regulation FD Disclosure Item 7. Exhibits 99.1 - Press Release - Vectren Corporation adjusts 2003 earnings guidance and addresses recent announcements related to the production of synthetic fuel 99.2 - Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 Item 9. Regulation FD Disclosure and Item 12. Results of Operations and Financial Condition On July 23, 2003, Vectren Corporation furnished information to the SEC on a Current Report on Form 8-K with respect to the release of financial information to the investment community regarding the Company's results of operations, for the three, six, and twelve month periods ended June 30, 2003. The financial information was released to the public through this filing. Item 7. Exhibits 99.1 - Press Release - Vectren Corporation Reports 2nd Quarter 2003 Results 99.2 - Press Release - Vectren Corporation Declares Regular Quarterly Dividend 99.3 - Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 Item 9. Regulation FD Disclosure and Item 12. Results of Operations and Financial Condition SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INDIANA GAS COMPANY, INC. ---------------------------- Registrant November 12, 2003 /s/ Jerome A. Benkert, Jr. ---------------------------- Jerome A. Benkert, Jr. Executive Vice President & Chief Financial Officer (Principal Financial Officer) /s/ M. Susan Hardwick ----------------------------- M. Susan Hardwick Vice President & Controller (Principal Accounting Officer)